In this issue:

Morgan Stanley's Roach: Global Economy 'Near Tipping Point'

Mortgage, Refi Requests Fall As Rates Rise

Bush's 'Ownership Society' Based on Soon-To-Pop Housing Bubble

CPI Soars in February

U.S. Economic/Financial News

Morgan Stanley's Roach: Global Economy 'Near Tipping Point'

In his company newsletter March 18, Morgan Stanley economist Stephen Roach warned strongly about a new, severe phase of the financial crisis. "It is only with the great luxury of hindsight that we can look back and know that the proverbial bell has rung. In my view, March 16, 2005 could end up in the running as a possible tipping point for America. Suddenly, the U.S. has taken on a very different aura in an increasingly unbalanced world: The confluence of a record current account deficit, a disaster from General Motors, and yet another new high for oil prices all speak of an increasingly precarious role for the global hegemony. World financial markets have barely begun to sniff that out."

Roach cited the rate of growth of the U.S. current account deficit, which reached "an all-time record of 6.3% of GDP in 4Q04—an astonishing 1.8 percentage point deterioration from the 4.5% deficit [as a percent of GDP] a year earlier in 4Q03." He dismisses the idea that foreign central banks are "over a barrel" and could not diversify out of the dollar. Instead, as the dollar's value falls, "The bigger the build-up of dollar reserves, the more this tradeoff is likely to tip toward dollar diversification."

Emphasizing the decline of "Smokestack America," with the collapse of GM, he focuses on the oil price spike: "The press, of course, is filled with commentary about how oil no longer matters... My experience tells me that this is precisely the rhetoric we always hear in the midst of an oil shock. And shock it is: In real terms, $56 oil represents more than a quadrupling from the lows of late 1998—putting this price spike very much on a par with those devastating blows of the 1970s."

Roach reviews the U.S. military overreach since Sept. 11, 2001, and concludes that "America is extending its reach at precisely the moment when its economic power base is weakening—a classic warning sign of the fall of a Great Power."

Mortgage, Refi Requests Fall As Rates Rise

The Mortgage Bankers Association said its index of mortgage application activity dropped 9.5% last week, and its index of refinancing activity fell 16.5%. MBA's purchase index, a measure of loan requests for home purchases, fell for the first time in four weeks, declining 3.5%. Refis are down a whopping 60% compared to last year, MBA said.

Meanwhile, sales of existing homes fell 0.4% in February, the National Association of Realtors said.

Bush's 'Ownership Society' Based on Soon-To-Pop Housing Bubble

In an article in the San Jose Mercury News March 20, that takes apart George Bush's noise-word "Ownership Society," economist James Galbraith looks at the risk built into ownership. "In no sector has the risk gone up more than in the great asset that defines the American middle class: housing. And in no place, surely, more than in California. Is California in a housing bubble?... The median sales price of Bay Area single-family houses hit a new monthly record in February, reaching $569,000. For Santa Clara County, the figure was $632,000, up 20 percent from a year earlier."

He adds, "And it's certain that housing in California is in hock—to an extent never before seen in our history and probably not in the history of any other place. It's clear, too, that American households as a whole are gradually coming to the limit of their willingness and ability to borrow against their homes to finance consumption expenditures of other types, from vacations to medical bills to college expenses to home furnishings—all of which have helped the economy. Mortgage debt is now more than 80 percent of personal disposable income, up from ... just 40 percent in 1984."

After reviewing UCLA's quarterly Anderson Forecast, which warned that much of the prosperity found across California comes from a real estate bubble, Galbraith states that, "As long as interest rates remain low, any deflation of a housing bubble would be slow.... But if interest rates rise, pushed up for any number of reasons by the Federal Reserve, then things might unravel more quickly. Would Alan Greenspan do that? Would he prick the bubble and crash the California housing market?", Galbraith asks, and then points out, "Today Greenspan has a weak dollar to defend. He has no way to defend it, except by raising short-term interest rates in the hopes of persuading the Chinese and Japanese to hold their dollars.... So far, long-term interest rates haven't gone up. But if the Fed continues to tighten, they eventually will. And then housing, stocks, business investment and exports—along with consumer spending—could go down together." Galbraith concludes that "Bush's ownership society won't be worth much if that happens." This would also pull the rug out from under California's Governator Schwarzenegger.

CPI Soars in February

The U.S. Consumer Price Index (CPI), which measures wholesale prices, rose by 0.4% in February, the biggest increase in four months. As the most widely used measure of inflation, the CPI is used as a means for adjusting income payments. Over 2 million workers are covered by collective bargaining agreements which tie wages to the CPI. In the U.S., the index affects the income of almost 80 million people as a result of statutory action: 47.8 million Social Security beneficiaries, about 4.1 million military and Federal Civil Service retirees and survivors, and about 22.4 million food stamp recipients. Changes in the CPI also affect the cost of lunches for the 26.7 million children who eat lunch at school. Some private firms and individuals use the CPI to keep rents, royalties, alimony payments, and child support payments in line with changing prices.

According to February's report, there were sharp increases in energy costs (2%), including gasoline (3.2%), natural gas (2.5%), and fuel oil (2.4%). Other increases included those for lodging (1.1%), transportation (0.8%), medical care (0.6%), airfare (1.5%), and education (0.5%). However, over the past 12 months, average weekly earnings have advanced only 2.2%. When adjusted for inflation, earnings are down by 0.8%. Some are said to be speculating that the Federal Reserve may "step up the pace of its rate increases" now, as inflation escalates.